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The Interdependent and Intertemporal Nature of Financial Decisions: An Application to Cash Flow Sensitivities

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  • VLADIMIR A. GATCHEV
  • TODD PULVINO
  • VEFA TARHAN
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    Abstract

    We develop a dynamic multiequation model where firms make financing and investment decisions jointly subject to the constraint that sources must equal uses of cash. We argue that static models of financial decisions produce inconsistent coefficient estimates, and that models that do not acknowledge the interdependence among decision variables produce inefficient estimates and provide an incomplete and potentially misleading view of financial behavior. We use our model to examine whether firms are constrained from accessing capital markets. Unlike static single-equation studies that find firms underinvest given cash flow shortfalls, we conclude that firms maintain investment by borrowing. Copyright (c) 2010 the American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 65 (2010)
    Issue (Month): 2 (04)
    Pages: 725-763

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    Handle: RePEc:bla:jfinan:v:65:y:2010:i:2:p:725-763

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    Cited by:
    1. Glaser, Markus & Lopez-de-Silanes, Florencio & Sautner, Zacharias, 2010. "Opening the Black Box: Internal Capital Markets and Managerial Power," MPRA Paper 28488, University Library of Munich, Germany.
    2. Seifert, Bruce & Gonenc, Halit, 2012. "Issuing and repurchasing: The influence of mispricing, corporate life cycle and financing waves," Journal of Multinational Financial Management, Elsevier, vol. 22(3), pages 66-81.
    3. Dahl, Drew, 2012. "Coincident correlations of growth and cash flow in banking," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1139-1143.
    4. Hohenstatt, Ralf & Steininger, Bertram, 2011. "The rat race of capital structure research for REITs and REOCs: Two spotlights on leverage," ZEW Discussion Papers 11-077, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    5. Bessler, Wolfgang & Drobetz, Wolfgang & Haller, Rebekka & Meier, Iwan, 2013. "The international zero-leverage phenomenon," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 196-221.
    6. Cho, Seong-Soon & El Ghoul, Sadok & Guedhami, Omrane & Suh, Jungwon, 2014. "Creditor rights and capital structure: Evidence from international data," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 40-60.
    7. Xu, Pisun (Tracy), 2013. "Managerial incentives and a firm's cash flow sensitivities," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 80-96.
    8. Drobetz, Wolfgang & von Meyerinck, Felix & Oesch, David & Schmid, Markus, . "Is Board Industry Experience a Corporate Governance Mechanism?," Working Papers on Finance 1401, University of St. Gallen, School of Finance.
    9. Vadim Khramov, 2012. "Asymmetric Effects of the Financial Crisis," IMF Working Papers 12/97, International Monetary Fund.
    10. Behr, Patrick & Norden, Lars & Noth, Felix, 2013. "Financial constraints of private firms and bank lending behavior," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3472-3485.
    11. Brancati, Emanuele, 2013. "Innovation activity and nancing constraints: evidence from Italy during the crises," MPRA Paper 47750, University Library of Munich, Germany.
    12. Özgür Arslan-Ayaydin & Chris Florackis & Aydin Ozkan, 2014. "Financial flexibility, corporate investment and performance: evidence from financial crises," Review of Quantitative Finance and Accounting, Springer, vol. 42(2), pages 211-250, February.
    13. Brancati, Emanuele, 2013. "Innovation, financial constraints and relationship lending: evidence from Italy during the recent crises," MPRA Paper 50329, University Library of Munich, Germany.

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